Reaching that age when you start considering your pension options, will now be filled with even more choices, flexibility and perhaps complexity, due to the shock announcements by the chancellor recently.
George Osborne said “the changes-due to come into law by April next year-were the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921”
There had already been some review work undertaken by the Financial Conduct Authority (FCA) into Annuities and retirement income as a whole and they had committed to further reviews.
Their work had established that some parts of the annuities market are not working well for some consumers and they found that eight out of ten consumers who purchase their annuity from their existing provider could get a better deal on the open market.
The chancellor basically seems to have ridden rough shot over the FCA’s plans and made some announcements prior to any further investigation by the FCA.
I have been providing advice to clients pre and post retirement since 1987 and some would say there has already been some very radical changes in that period, but I must agree these changes go beyond any flexibility that has previously existed and maybe not all good!
So what are these ‘radical ‘changes the Chancellor refers to: Briefly:
- Lump Sums from your funds: From April 2015, the way that you will be able to access your Pension Fund will change, with you being able to take 25% Tax Free and then access the balance in cash, subject to income tax at your marginal rate.
This should mean that you will have a wider range of options when it comes to taking your pension benefits at retirement. In essence meaning you have the option of not buying an Annuity anymore and take the remaining pension fund as a lump sum to do what you want with-Spend, Spend, Spend, Invest, Buy Property, pay off large liabilities etc, the choice will be yours, which could be a good thing when it comes to flexibility.
Although the option of not buying an annuity exists now in leaving some of your pension fund invested via a method called ‘Drawdown’ the fact you will be able to basically access all of your fund as a lump sum, without taking an income, could be a double edged sword!
- Trivial Funds: Some of the changes made have already come into effect as of the 27 March and the rules have changed regarding those who have only built up a small fund, known as ‘Trivial Funds’ or the Triviality rules. Accessing your funds under these rules has been around for some time.
At age 60, providing your funds did not exceed a certain limit,- prior to 2014 it was £18000, now it will be £30000, you could access the whole funds, less Tax Free Cash and some income tax, as a lump sum and many people have accessed their funds this way and it will still apply to many more, but a number of factors have to be taken into account including any existing pension in payment or due in the future and it’s an area where advice is paramount, to avoid any tax charges.
- Small Pots: The rules around Small Pots came into place in 2012 to add more flexibility and to give people aged 60 and above, the choice of not having to buy an annuity with such a small pot. Providing you had no more than two ‘pots’ totalling no more than £2000 you could have the whole fund as a lump sum. This has now changed to three pots not exceeding £10,000.
- Drawdown: The method of taking Tax Free Cash from your pension fund and leaving the balance invested for the potential of further growth, with income taken or not, has not fundamentally changed and has been around for some time. But the limits and amounts you can take as income have increased and indeed some limits have reduced, including amounts paid on death. There is a concern that more people will use drawdown as opposed to purchasing an annuity, which could be a good thing, but with funds remaining invested, comes with a risk to capital and this is an area that has always warranted advice and nothing will change there.
Summary: The overall changes to the way you will be able to take your benefits will now offer unprecedented levels of flexibility and choice, to both personal pension and occupational members and we believe this choice will bring a greater need for advice. The government have indicated that everyone should have access to free guidance when considering their options, but as of yet the details of this have not been clarified, but thankfully they do recognise that advice will be essential.
Recent headlines have focused on the need to no longer buy an annuity-this has in fact been the case for some time, the real change is that funds will be able to be withdrawn without limit.
The need for annuity advice and purchase will remain and for many people, may still be the preferred route, as long as income is required in retirement.